Changes to Income Tax charges for Trusts & Estates effective from April 2024

Changes announced in the Spring Budget of 2023, affecting the way in which Trust and Estates will be charged to income tax, will come into force from 6 April 2024.

From April 2024, Trusts and Estates with income of £500 or under (from any source, i.e. interest, dividends or rent) will not have to file a return, and the tax liability of the trustees and personal representatives will be taken to be nil (para 10, Sch 2, F(No.2)A 2023 which inserts new s24B, Income Tax Act 2007). Where income from all sources exceeds £500 the whole of the income will be subject to tax at the Basic Rate, in an estate, or the Rate Applicable to Trusts for trustees.

The £500 limit is reduced proportionately where a settlor has established more than one trust to a minimum of £100 per trust, but this excludes interest in possession trusts, settlor interested trusts, vulnerable beneficiary trusts and heritage maintenance trusts.

This replaces the previous concession for Estates, which provided that if the only income was interest and the tax due was less than £100 (i.e. less than £500 of interest income per year) then no tax was reportable or payable. The Starting Rate Band for Trusts, which provided for the first £1,000 of trust income to be taxed at basic rates rather than the rate applicable to trusts, will also be abolished.

For the beneficiaries of an estate where the income is below the £500 limit, legislation will be amended to that the “net income” of a UK estate is treated as £nil so it is not chargeable in the hands of the beneficiary when distributed from the estate.

For Trusts, the exemption does not override that tax credit and tax pool charge that attaches to discretionary income distributions, and the trustees will still have to pay sufficient tax to frank an income distribution (currently at 45%).

In HMRC’s Spring Budget 2023 red book (p4.35), in addition to the reforms above, they stated their intention to make changes to Inheritance Tax regulations to remove non-taxpaying trusts from reporting requirements.

This would be a welcome change for many trusts that, despite there being no IHT due on a chargeable event, are still required to submit a return because the value of their assets exceeds 80% of the available nil rate band.

We have not heard anything further on these proposals and the suggestions that the current government may be ‘scrapping’ IHT altogether may mean that these changes will not be forthcoming. This could mean a continued administrative burden for trustees and HMRC alike, where the settlement is not excepted from filing an IHT return but they have no IHT to pay.

It remains to be seen if reporting reforms have been considered further by HMRC and their outcomes.